October 8, 2016

Following the publication in Economic Thought of my paper “A Quantum Theory of Money and Value” I have received a number of interesting comments and questions from readers, and this post is an attempt to clarify some of the points which came up. For a description of the theory, please see the paper, or (for the book version) The Evolution of Money.

What is a money object?

These are objects – either real or virtual – which have a fixed numerical value in currency units. Just as quantum objects have dual real/virtual properties, so do money objects (bitcoins don’t seem like objects, until you lose the hard drive they are located on). Money objects are unique in that they have a fixed numerical price. Other objects or services attain their price by being traded for money objects in markets.

Is money an emergent phenomenon?

Money objects are designed (e.g. by the state) to have a set price. The prices of other things emerge as the by-product of money-based markets, which themselves emerge into being as money objects become commonly used. Therefore prices and markets can be viewed as emergent phenomena, but money itself is better seen as a carefully designed technology. (Of course the way that e.g. cybercurrencies emerge into actual use, as markets develop around them, can also be described as an emergent phenomenon.)

What does money measure?

Nothing. Because prices emerge from the use of money objects, one consequence is that price should not be viewed as an accurate measure of “labor”, “utility”, “economic value”, or any other quantity. Money is better viewed as a fundamental quantity, like electrical charge. Money objects, as used in markets, are a way of attaching numbers to things, but that is not the same as measuring them in some way. Of course market forces tend to align prices with some vague idea of value, but the process is far from exact, and money has its own dynamics (which is one reason CEOs in the US earn over 300 times the median wage of their employees). Note this contradicts the Aristotelian idea, later expressed by Aquinas, that money was “the one thing by which everything should be measured.”

Why quantum?

The comparison with quantum theory comes about because money is treated as a fundamental quantity (from the Latin quantum); and money objects are a way of combining the notions of number and value, which are as different from one another as the dual wave/particle properties of matter. For example, number is stable, while value varies with time. Money objects are therefore fundamentally dualistic.

As mentioned in The Evolution of Money, other authors and economists (and many others) have used the term “quantum” in different ways. One example is Charles Eisenstein’s Sacred Economics, where in an appendix called “Quantum Money and the Reserve Question” he notes “the similarity between fractional-reserve money and the superposition of states of a quantum particle,” in the sense that money can seem to exist in more than one place at the same time. The quantum macroeconomics school, also known as the theory of money emissions, which dates to the 1950s, gained its name from the idea that production is an instantaneous event that quantizes time into discrete units. A completely different concept is quantum money, which exploits quantum physics in an encryption technique.

What inspired the approach?

One thing is the history of money. The most concrete example of a money object is a coin, which consists of a number pressed into a piece of metal. These date to the time when Greek philosophers were developing the first theories of mathematics. Pythagoras believed that the universe was based on number, and money can be seen as a way of making that true by impressing numbers onto the real world. However mixing the properties of number and things produces a strange kind of alchemy. See this presentation for the 2015 Marshall McLuhan lecture at transmediale in Berlin for a discussion.

How does this differ from the usual understanding of the role of money?

One consequence of the theory is that it inverts the usual narrative of mainstream economics. Since the time at least of Adam Smith, economists have downplayed the importance of money, seeing it as a kind of neutral chip that emerged as a way of facilitating barter. But instead of money emerging from markets, it is more accurate to say that the use of money (jumpstarted by the state) prompted the emergence of markets. And far from being an inert chip, money is an active, dualistic substance with powerful and contradictory properties. Putting numbers on things changes the way they behave.

What is the mathematical map or connection between price and value?

In general there is no such map. Price is an emergent property, which means it need not be computable at all. Of course it is possible to come up with some rules of thumb, but there are no fundamental laws as in physics.

What are the implications for economic modelling?

Economic analysis usually assumes that price and value (in the sense of e.g. utility) are one and the same, and then go on to base economic models on ideas such as utility maximization. But according to the theory presented here, prices do not perfectly measure value or anything else. Instead, prices are fundamentally indeterministic. This introduces a profound uncertainty into any kind of economic calculation. (See related article The true value of money at Adbusters.)

June 27, 2016

This week (June 27-July 1) the Columbia University Press blog will be featuring content from or about The Evolution of Money, starting with a book giveaway – you can enter the competition for a free copy here.

May 31, 2016

Latest book The Evolution of Money with Roman Chlupatý is published this week by Columbia University Press. Gives the story of money from clay tablets to bitcoins, and describes how it continues to evolve.

February 8, 2016

In her 1969 book, On Death and Dying, the Swiss psychiatrist Elisabeth Kübler-Ross identified five separate stages or aspects of the grief process. These were denial, anger, bargaining, depression, and acceptance.

The field of economics experienced a traumatic loss during the financial crisis, which left Alan Greenspan in what he called in 2008 testimony “a state of shocked disbelief.” Economists are now working their way slowly through the grief progress, as they realise that their treasured economic models not only failed to predict the crisis, but played an active role in creating it.

The first two stages have already been charted in this blog. A 2014 post asked Is economics in a state of denial? (the answer was: yes). 2015’s Book burning economists discussed the anger that some economists were venting on certain critics (e.g. me). The next stage – and the subject of this post – is “bargaining”. Part of this is bargaining with the future – if we follow certain rules perhaps we can put things right – but another is a kind of retroactive bargaining with the past, saying that the event would not have occurred if only such-and-such had happened.

A case in point is the book Economics Rules: The Rights and Wrongs of the Dismal Science, by Dani Rodrik of Harvard University, which sets out to explain “why economics sometimes gets it right and sometimes doesn’t.” Rodrik’s conclusion is that mathematical models “are both economics’ strength and its Achilles’ heel.” On the one hand they offer a degree of clarity and consistency which is not possible with purely verbal descriptions. However they are easily misused or taken out of context.

Telling a story

As Rodrik points out, models are best seen as a kind of story. No single model can accurately capture every detail of the economy, but it can illuminate some aspect of the system. The trick is therefore to choose which model is the most suitable for any particular situation. One conclusion is that very large and general models, of the sort often favoured by macroeconomists, are not very useful: “I cannot think of an important economic insight that has come out of such models. In fact, they have often led us astray.”

Rodrik also acknowledges that most economists missed the causes of the financial crisis, with some notable exceptions who were quickly shouted down (such as the IMF’s Raghuram Rajan, who in 2005 told an audience of central bankers including Alan Greenspan and Ben Bernanke that financial innovation had introduced new risks into the financial system, only to be called a “Luddite” by Larry Summers).

According to Rodrik, the reason that the profession did not cover itself in glory before and during the crisis was that leading economists had bought into the dominant efficient market paradigm which saw markets “not only as inherently efficient and stable, but also as self-disciplining.” Regulators just had to get out of the way and the invisible hand would do its job. However, economists use all kinds of models in their work, and “what makes this episode particularly curious is that there were, in fact, plenty of models to help explain what had been going on under the economy’s hood.”

If only they had chosen the right model, perhaps something could have been done! Indeed one such model, which Rodrik does not mention, is that of Hyman Minsky, whose work on financial stability became famous after the crisis, but was all but unknown before it; an assessment published a year after his 1996 death concluded that his “work has not had a major influence in the macroeconomic discussions of the last thirty years.” Curious indeed.

Rodrik also seems a little surprised by claims, from student-based groups such as Manchester University’s Post Crash Economics Society, that economics is overly narrow and lacks pluralism. “How do we understand these complaints,” Rodrik asks, “in light of the patent multiplicity of models within economics?”

A possible reason might be that economists have what he notes is a “guild mentality” which “renders the profession insular and immune to outside criticism.” He observes in a couple of places that “Only card-carrying members of the profession are viewed as legitimate participants in economic debates.” But later he cites the influence of behavioural psychologists and so on to conclude that “the view of economics as an insular, inbred discipline closed to outside influence is more caricature than reality.”

His answer instead is that there is nothing wrong with economics per se, there is just a communication problem. Most economists are poor at presenting their arguments to the public, because they “see themselves as scientists and researchers whose job it is to write academic papers.” Also undergraduate students at Manchester, or Rodrik’s Harvard where students launched their own protest in 2011, obviously don’t get exposed to the full rich diversity of economic thought. Though this still doesn’t quite explain why, as Cambridge University economists Ha-Joon Chang and Jonathan Aldred wrote in 2014, their subject “is the only academic discipline in which a significant and increasing number of students are in an open revolt against the content of their degree courses.”

Good grief

Rodrik concludes his book with “Ten Commandments” – though “bargaining points” might be a better term – for economists, and ten for noneconomists. The latter includes “If you think all economists think alike, attend one of their seminars” and “If you think economists are especially rude to noneconomists, attend one of their seminars” (as if rudeness were a sign of healthy debate). However there is no such exhortation for economists to attend seminars outside their own field; and indeed the book makes little attempt to find out what these complaints from students, hetereodox economists, and other non-card carriers actually are.

For example, one of the major criticisms of economic models is that they rarely account for the effects of money, banks, credit, or the financial sector. This omission, which played a hugely important role in the crisis, is beyond curious, it is downright bizarre; but as with other such books to emerge from the mainstream there is hardly any mention of money, apart from the observation that phenomena such as bubbles and bank runs have been known about for a long time. Nor does the book come to grips with the interesting questions of why theories of non-conformists such as Minsky were repressed, or why the field’s core teachings of efficiency, rationality, etc. came to be so perfectly aligned with the PR needs of the financial sector.

Economics Rules offers many useful and valid insights into the nature of economic models, but attempts to rationalise away the problems which confront the field rather than face them squarely. So here is not a commandment, but a gentle suggestion to economists in this difficult time: let’s try to get stage 4 (“depression”) over with quickly, it’s time for stage 5: “acceptance”.

Stay tuned.

Update: A version of this article was published in the February issue of the WEA Newsletter.

September 6, 2015

This sentiment has been expressed by people from the physicist turned hedge-fund manager Jean-Philippe Bouchaud (in a 2008 paper), to the Bank of England’s Andrew Haldane (in a 2014 foreword for Manchester’s student-run Post-Crash Economics), to activist groups such as Kick It Over. So what would such a revolution look like?

Perhaps the archetypal model for a scientific revolution is the quantum revolution that shocked the world at the turn of the last century. In the space of a few short years, almost everything that was known about the nature of matter was overturned. The Newtonian view of the world as a predictable machine crumbled with it.

Except, that is, in economics – which continues to base its models on quasi-Newtonian economic laws.

August 19, 2015

Is bitcoin money? To its users the answer will be a resounding yes, but to many people, including former Federal Reserve Chairman Alan Greenspan, the answer is less clear. Indeed, one of the things holding back the adoption of cybercurrencies such as bitcoin is that they do not conform with traditional ideas about money.

July 19, 2015

The answer to the question “what is money?” has changed throughout history. During the gold standard era, money was seen as gold or silver (the theory known as bullionism). In the early 20th century, the alternative theory known as chartalism proposed that money was a token chosen by the state for payment of taxes. Today, many economists take an agnostic line, and argue that money is best defined in terms of its function, e.g. as a neutral medium of exchange. This paper argues that none of these approaches adequately describe the nature of money, and proposes a new theory, inspired by non-Newtonian physics, which takes into account the dualistic real/virtual properties and complex nature of money. The theory is applied to the example of the emergence of cybercurrencies.